Oil Industry Seeks to Cast Huge Profits as No Big Deal

By Terence O'HaraOctober 28, 2005

By most familiar comparisons, the $9.92 billion profit earned by Exxon Mobil Corp. in just three months is almost unimaginable. It would cover all Social Security benefit payments for three months. It would pay for an Ivy League education for about 60,000 kids. It would pay the average list price for more than 160 Boeing 737s. It would fund the military operations in Iraq and Afghanistan for more than two months.

Yet oil industry representatives and Exxon Mobil yesterday made a game effort to cast the record profit, earned during a quarter in which the Gulf Coast was shattered by hurricanes and gas prices rose well above $3 a gallon, as middling at best.

That's the exact opposite of what most companies do during earnings season. They usually go to some length to put their performances in the best light, highlighting certain numbers that show marked improvement while downplaying less flattering measurements.

Exxon Mobil, in newspaper advertisements and in the usually rah-rah forum of the earnings conference call with Wall Street analysts, sought instead to demonstrate its bottom-line modesty. Perhaps mindful of mounting anger over gas prices and calls by some Democrats in Congress to impose a "windfall" tax on oil company profits, it said its industry's profits over time were not as lucrative as those in banking, pharmaceutical and many other industries.

Such comparisons are Wall Street's standard tools for evaluating companies, taking into account a firm's level of capital investment and the risks involved in the business. After all, how much one company makes is meaningful only in relation to what another company makes when an investor is deciding which to invest in.

For instance, in 2004 Exxon Mobil earned more money -- $25.33 billion -- than any other company on the Fortune 500 list of largest corporations. But by another measure of profitability, gross profit margin, it ranked No. 127.

Jay Taparia, a lecturer in finance at the University of Illinois at Chicago and an expert on interpreting financial statements, said a quarterly profit or loss can only be judged in context, given the history of the company and its long-term prospects.

"People who are freaking out about Exxon's record profit are the same people who were freaking out about AOL Time Warner's record losses" of $98.2 billion in 2002, he said. "One quarter's net income or loss doesn't mean anything."

A $9.9 billion quarterly profit is mostly a function of Exxon Mobil's size. It had sales of $100 billion this quarter, more than any other U.S. company. At its current rate of growth, Exxon Mobil will be the biggest U.S. corporation this year by revenue, bigger than Wal-Mart Stores Inc., which had $288.19 billion in revenue last year. Generally, the bigger the company, the bigger the bottom line.

Even so, many companies smaller than Exxon Mobil "earn" more, depending on what measure is used.

Most financial institutions, such as commercial banks, are routinely more profitable than Exxon Mobil was in its third quarter. For example, Exxon Mobil's gross margin of 9.8 cents of profit for every dollar of revenue pales in comparison to Citigroup Inc.'s 15.7 cents in 2004. By percentage of total revenue, banking is consistently the most profitable industry in America, followed closely by the drug industry.

Altria Group, the maker of Marlboro and other cigarettes, made 22 cents for every dollar of revenue in 2004, and pharmaceutical company Merck made 25.3 cents for every dollar of revenue in 2004.

By other measures, such as profit per employee, return on invested capital and free cash flow, Exxon Mobil is nowhere near a standout.

Oil industry analysts yesterday also pointed out that while times are good for oil companies, one of the reasons is the huge American demand for gas at a time when supply is constrained. And the cost of extracting and refining oil in the coming years is only going to increase, requiring hundreds of billions of dollars of investment. Energy research firm John S. Herold Inc. last month predicted that despite short-term increases in profits, higher costs will probably make many U.S. oil companies less profitable in the next five years, even as their revenue grows rapidly.

"The industry has pressure points, which in time will likely impact its forward momentum," said Herold chief executive Arthur L. Smith.

That momentum was checked a little yesterday. Exxon Mobil's stock closed yesterday at $55.60 a share, down 60 cents.